Human Rights in the Supreme Court: How Should Companies Respond?

Thursday October 27, 2011

The U.S. Supreme Court decided last week to review a contentious case involving corporate liability for alleged human rights abuses committed abroad. A decision that corporations can be liable in U.S. courts could leave several companies with international operations exposed to potential liability. How should companies respond?

The case under review is Kiobel v. Royal Dutch Shell, a Second Circuit Court of Appeals decision that denied a group of Nigerians the right to pursue their case in U.S. court for alleged human rights violations in the 1990s. At issue is whether the Alien Tort Statute (ATS)—a U.S. law that allows non-resident “aliens” to sue in U.S. courts for violations of international law—can be applied to corporations accused of involvement in human rights abuses. Several cases filed over the last 15 years have raised this question. However, lower appellate courts are divided in their opinion, and the current law is unclear.

Supreme Court cases are notoriously difficult to predict, and this one could easily go either way. Three appellate courts have held that corporations can be held liable, while one appellate court (Kiobel) held that they cannot. One surprising opinion favoring liability was authored by Judge Richard Posner, a prominent conservative judge sitting on the Seventh Circuit Court of Appeals. His argument—which asserts that the law provides good incentives for companies to police potential bad behavior by employees and contractors abroad—could sway moderate justices on the Supreme Court. However, the Supreme Court may view the issue as too complicated for judicial resolution and punt to Congress to clarify the meaning of the law.

Regardless of how the Supreme Court rules, companies can respond to the court’s decision to review the case in two ways: wait for the court’s decision or take a proactive approach to address human rights issues now.

The wait-and-see strategy is a losing proposition. Momentum in the legal community favors transparency and engagement, and a Supreme Court ruling will not likely change this. The recently adopted UN Guiding Principles on Business and Human Rights, which are likely to spur more regulation and standard setting in this area, provide a framework for companies to design effective human rights policies and processes. Legislatures have begun passing laws that require companies to identify and mitigate human rights and labor issues, including the California Transparency in Supply Chains Act. Similar laws are being considered at the federal level in the United States, and discussions are underway in the U.K. parliament and the EU. Stakeholders have argued for corporate liability for over 20 years and have supported efforts by leading companies to develop robust policies and procedures. An adverse Supreme Court ruling will not make the issue disappear.

A Supreme Court ruling confirming corporate liability under the ATS, however, could bring a flurry of lawsuits against companies, leading to prolonged litigation and reputational damage. One would think that companies most exposed to liability are those that have taken no action to implement human rights management systems. But why wait for a judge to decide?

The better strategy is for companies to take a proactive approach to ensure that they are doing everything possible to prevent human rights abuses from occurring in the first place. No company is perfect, but every company should ensure that they have policies and processes in place for addressing human rights impacts associated with their business relationships. Strong policies combined with effective enforcement mechanisms go a long way toward mitigating human rights abuses before they ever reach the doors of a courthouse.

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Following the UK Supreme Court's recent decision in Vedanta v. Lungowe, we believe it is in the best interest of companies to double down on working with subsidiaries to ensure they properly understand and adequately manage environmental and social risk.

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